**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**ý****        QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

**For thequarterly period ended June 30, 2002**

 

**OR**

 

**o****        TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission file number 001-16047**

 

**Advanced Power Technology, Inc.**

*(Exact name of registrant as specified in its charter)*

 

| **Delaware**                                                      |   | **93-0875072**                             |
|-------------------------------------------------------------------|--------|--------------------------------------------|
| *(State or other Jurisdiction of  Incorporation or Organization)* |   | *(I.R.S. Employer  Identification Number)* |
|                                                              |   |                                       |
| **405 SW Columbia Street, Bend,  Oregon  97702**             |
| *(Address of principal executive  offices and Zip Code)*          |
|                                                              |   |                                       |
| **(541) 382-8028**                                                |
| *(Registrant’s telephone number)*                            |

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to thefiling requirements for the past 90 days. Yes  ý    No o

 

The number of shares of the Registrant’s Common Stock outstanding as ofAugust 9, 2002 was 10,384,898 shares.

 

 

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**ADVANCEDPOWER TECHNOLOGY, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

** **
| **Part I**  | **Financial  Information** |
|-------------|----------------------------|
|        |                       |   |
|        |                       |   |
|        | Item 1.                    | Financial Statements: |
|        |                       |   |
|        |                       | Consolidated Balance Sheets  as of June 30, 2002 and December 31, 2001 |
|        |                       |   |
|        |                       | Consolidated  Statements of Operations for the three and six months ended June 30, 2002 and  2001 |
|        |                       |   |
|        |                       | Consolidated  Statements of Cash Flows for the six months ended June 30, 2002 and 2001 |
|        |                       |   |
|        |                       | Notes to  Consolidated Financial Statements |
|        |                       |
|        | Item  2.                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|        |                       |
|        | Item  3.                   | Quantitative  and Qualitative Disclosure About Market Risk |
|        |                       |
|        |                       |   |
| **Part II** | **Other Information**      |
|        |                       |   |
|        | Item 6.                    | Exhibits and  Reports on Form 8-K |
|        |                       |   |
|        | Signature                  |
|        |                       |   |
|        | Exhibits                   |
|        |                       |   |
|             |                            |  |  |  |

 

2

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**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands, except share amounts)**

 

 
|                                                                                                                                                                                        |   | **June 30,  2002** |   | **December 31,  2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|------------------------|--------|
|                                                                                                                                                                                        |   | **(Unaudited)**    |   |                   |   |
| **Assets**                                                                                                                                                                                  |   |               |   |                   |   |
| Current assets:                                                                                                                                                                             |   |               |   |                   |   |
| Cash and cash equivalents                                                                                                                                                                   |   | $                  | 2,458  |                   | $      | 16,102 |   |
| Short-term investments                                                                                                                                                                      |   | 15,491             |   | 17,093                 |   |
| Accounts receivable, net of allowance of $187 (2002)  and $59 (2001)                                                                                                                        |   | 7,274              |   | 3,493                  |   |
| Inventories, net                                                                                                                                                                            |   | 12,940             |   | 9,307                  |   |
| Prepaid expenses and other current assets                                                                                                                                                   |   | 2,369              |   | 3,422                  |   |
| Total current assets                                                                                                                                                                        |   | 40,532             |   | 49,417                 |   |
| Property and equipment, net of accumulated amortization  and depreciation of $9,927 (2002) and $8,804 (2001)                                                                                |   | 10,466             |   | 5,546                  |   |
| Long-term investments in available-for-sale securities                                                                                                                                      |   | 1,000              |   | 2,473                  |   |
| Other assets                                                                                                                                                                                |   | 658                |   | 639                    |   |
| Technology rights, net of accumulated amortization of  $339 (2002)                                                                                                                          |   | 10,425             |   | —                 |   |
| Goodwill                                                                                                                                                                                    |   | 15,980             |   | —                 |   |
| Total assets                                                                                                                                                                                |   | $                  | 79,061 |                   | $      | 58,075 |   |
|                                                                                                                                                                                        |   |               |   |                   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                               |   |               |   |                   |   |
| Current liabilities:                                                                                                                                                                        |   |               |   |                   |   |
| Accounts payable                                                                                                                                                                            |   | $                  | 3,138  |                   | $      | 2,805 |   |
| Accrued expenses                                                                                                                                                                            |   | 2,058              |   | 1,031                  |   |
| Current portion of capital lease obligations                                                                                                                                                |   | 82                 |   | 73                     |   |
| Total current liabilities                                                                                                                                                                   |   | 5,278              |   | 3,909                  |   |
| Deferred tax liability                                                                                                                                                                      |   | 2,296              |   | —                 |   |
| Capital lease obligations, less current portion                                                                                                                                             |   | 31                 |   | 58                     |   |
| Deferred gain on sale leaseback                                                                                                                                                             |   | 151                |   | 160                    |   |
| Total liabilities                                                                                                                                                                           |   | 7,756              |   | 4,127                  |   |
|                                                                                                                                                                                        |   |               |   |                   |   |
| Stockholders’ equity:                                                                                                                                                                  |   |               |   |                   |   |
| Preferred stock, par value $.001, 1,000,000 shares  authorized; no shares issued and outstanding                                                                                            |   | —             |   | —                 |   |
| Common stock, par value $.01, 19,000,000 shares  authorized; 10,487,763 issued and 10,378,906 shares outstanding in 2002;  8,836,637 shares issued and 8,727,780 shares outstanding in 2001 |   | 105                |   | 88                     |   |
| Additional paid-in capital                                                                                                                                                                  |   | 88,292             |   | 67,640                 |   |
| Treasury stock, at cost, 108,857 shares                                                                                                                                                     |   | (1,700             | )      | (1,700                 | )      |
| Deferred stock compensation                                                                                                                                                                 |   | (428               | )      | (166                   | )      |
| Accumulated other comprehensive income                                                                                                                                                      |   | 177                |   | 117                    |   |
| Accumulated deficit                                                                                                                                                                         |   | (15,141            | )      | (12,031                | )      |
| Total stockholders’ equity                                                                                                                                                             |   | 71,305             |   | 53,948                 |   |
| Total liabilities and stockholders’ equity                                                                                                                                             |   | $                  | 79,061 |                   | $      | 58,075 |   |

 

See accompanyingnotes to consolidated financial statements.

 

3

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**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands, except per shareamounts)**

**(Unaudited)**

 
|                                                                                       |   | **Three Months Ended  June 30** |   | **Six Months Ended  June 30,** |   |
|--------------------------------------------------------------------------------------------|--------|---------------------------------|--------|--------------------------------|--------|
|                                                                                       |   | **2002**                        |   | **2001**                       |   | **2002** |   | **2001** | ** ** |
| Revenues, net                                                                              |   | $                               | 10,694 |                           | $      | 11,526 |   | $ | 18,933 |   | $ | 24,684 |   |
| Cost of goods sold                                                                         |   | 7,074                           |   | 7,274                          |   | 12,686 |   | 15,218 |   |
| Amortization of technology rights & other                                              |   | 565                             |   | —                         |   | 957 |   | — |   |
| Total cost of goods sold                                                                   |   | 7,639                           |   | 7,274                          |   | 13,643 |   | 15,218 |   |
| Gross profit                                                                               |   | 3,055                           |   | 4,252                          |   | 5,290 |   | 9,466 |   |
| Operating expenses:                                                                        |   |                            |   |                           |   |   |   |   |   |
| Research and development                                                                   |   | 960                             |   | 465                            |   | 1,981 |   | 816 |   |
| Selling, general and administrative                                                        |   | 3,023                           |   | 2,668                          |   | 5,533 |   | 5,394 |   |
| In-process research & development                                                      |   | 211                             |   | —                         |   | 2,108 |   | — |   |
| Total operating expenses                                                                   |   | 4,194                           |   | 3,133                          |   | 9,622 |   | 6,210 |   |
| Income (loss) from operations                                                              |   | (1,139                          | )      | 1,119                          |   | (4,332 | ) | 3,526 |   |
| Interest income, net                                                                       |   | 162                             |   | 474                            |   | 381 |   | 997 |   |
| Other income (loss), net                                                                   |   | (48                             | )      | 32                             |   | (9 | ) | 113 |   |
| Income (loss) before income tax expense                                                    |   | (1,025                          | )      | 1,625                          |   | (3,960 | ) | 4,366 |   |
| Income tax expense (benefit)                                                               |   | (480                            | )      | 482                            |   | (850 | ) | 1,441 |   |
| Net income (loss)                                                                          |   | $                               | (545   | )                              | $      | 1,143 |   | $ | (3,110 | ) | $ | 2,925 |   |
|                                                                                       |   |                            |   |                           |   |   |   |   |   |
| Net income (loss) per share:                                                               |   |                            |   |                           |   |   |   |   |   |
| Basic                                                                                      |   | $                               | (0.05  | )                              | $      | 0.13 |   | $ | (0.31 | ) | $ | 0.34 |   |
| Diluted                                                                                    |   | (0.05                           | )      | 0.12                           |   | (0.31 | ) | 0.32 |   |
| Weighted average number of shares used in the  computation of net income (loss) per share: |   |                            |   |                           |   |   |   |   |   |
| Basic                                                                                      |   | 10,356                          |   | 8,623                          |   | 10,105 |   | 8,538 |   |
| Diluted                                                                                    |   | 10,356                          |   | 9,264                          |   | 10,105 |   | 9,271 |   |

 

See accompanying notes to consolidated financialstatements.

 

4

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**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
|                                                                                      |   | **Six Months Ended  June 30,** |       |
|-------------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                      |   | **2002**                       | ** ** | **2001** | ** ** |
| Cash flows from operating activities:                                                     |   |                           |       |   |   |
| Net income (loss)                                                                         |   | $                              | (3,110     | ) | $ | 2,925 |   |
| Adjustments to reconcile net income (loss) to net cash  provided by operating activities: |   |                           |       |   |   |
| Depreciation and amortization                                                             |   | 1,477                          |       | 594 |   |
| Inventory provisions                                                                      |   | 170                            |       | 109 |   |
| Amortization of deferred stock compensation                                               |   | 276                            |       | 121 |   |
| Amortization of investment discount                                                       |   | 77                             |       | — |   |
| Deferred gain on sale-leaseback                                                           |   | (9                             | )          | (9 | ) |
| Non-cash charge for in-process research &  development                                |   | 2,108                          |       | — |   |
| Changes in operating assets and liabilities, net of  effects of acquisitions:             |   |                           |       |   |   |
| Accounts receivable                                                                       |   | (1,267                         | )          | (908 | ) |
| Inventories                                                                               |   | 1,523                          |       | (1,446 | ) |
| Prepaid expenses and other assets                                                         |   | 1,570                          |       | (179 | ) |
| Accounts payable and accrued expenses                                                     |   | 155                            |       | (563 | ) |
| Net cash provided by operating activities                                                 |   | 2,970                          |       | 644 |   |
| Cash flows from investing activities:                                                     |   |                           |       |   |   |
| Purchases of available-for-sale securities                                                |   | (4,480                         | )          | (13,438 | ) |
| Proceeds from sale of available-for-sale securities                                       |   | 15,066                         |       | 7,033 |   |
| Payment for acquisitions, net of cash acquired                                            |   | (26,569                        | )          | — |   |
| Proceeds from sale of property and equipment                                              |   | 72                             |       | — |   |
| Purchase of property and equipment                                                        |   | (1,013                         | )          | (1,517 | ) |
| Net cash used in investing activities                                                     |   | (16,924                        | )          | (7,922 | ) |
| Cash flows from financing activities:                                                     |   |                           |       |   |   |
| Payments on capital lease obligations                                                     |   | (36                            | )          | (45 | ) |
| Principal payments on long-term debt                                                      |   | —                         |       | (20 | ) |
| Proceeds from exercise of stock options                                                   |   | 342                            |       | 429 |   |
| Net cash provided by financing activities                                                 |   | 306                            |       | 364 |   |
| Effects of exchange rate changes on cash                                                  |   | 4                              |       | 95 |   |
| Net change in cash and cash equivalents                                                   |   | (13,644                        | )          | (6,819 | ) |
| Cash and cash equivalents at beginning of period                                          |   | 16,102                         |       | 25,326 |   |
| Cash and cash equivalents at end of period                                                |   | $                              | 2,458      |   | $ | 18,507 |   |
|                                                                                      |   |                           |       |   |   |
| Supplemental disclosure of cash flow information:                                         |   |                           |       |   |   |
| Cash received (paid) during the period for:  Interest expense                        |   | $                              | (38        | ) | $ | (44 | ) |
| Income taxes                                                                              |   | 1,395                          |       | (1,223 | ) |
|                                                                                      |   |                           |       |   |   |
| Supplemental disclosure of noncash activities:                                            |   |                           |       |   |   |
| Unrealized gain (loss) on short-term and long-term  investments                           |   | $                              | (42        | ) | $ | 45 |   |
| Issuance of stock and options for acquisition of business                                 |   | 20,313                         |       | — |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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**ADVANCED POWER TECHNOLOGY, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Dollars in thousands)**

 

**Note1.  BASIS OF PRESENTATION**

 

The accompanying unaudited consolidated financialstatements include normal recurring adjustments necessary for a fairpresentation of Advanced Power Technology, Inc.’s (APT) interim results.  The consolidated financial statements andnotes in this Form 10-Q are presented as permitted by Regulation S-X, and assuch, they do not contain certain information included in APT’s 2001 annualconsolidated financial statements and notes. This Form 10-Q should be read in conjunction with APT’s consolidatedfinancial statements and notes included in its Annual Report on Form 10-K forthe year ended December 31, 2001.  Thefinancial information as of December 31, 2001 is derived from the auditedconsolidated financial statements as filed with APT’s Annual Report on Form10-K for the year ended December 31, 2001. The results of operations for the six months ended June 30, 2002 are notnecessarily indicative of the results expected for the entire fiscal yearending December 31, 2002.

 

APT’s financial quarters are 13 week periods. Thesecond quarter of 2002 ended on June 30 and the second quarter of 2001 ended onJuly 1.  For convenience, the secondquarters of 2002 and 2001 are shown as ended on June 30.

 

**Note 2.  COMPREHENSIVE INCOME**

 

Comprehensive income is the total of net income andall other non-owner changes in equity. Comprehensive income includes foreigncurrency translations and unrealized gains and losses from investments, aspresented in the following table (unaudited).

 
|                                                    |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|---------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                    |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** | ** ** |
| Net income (loss)                                       |   | $                                | (545   | )                              | $      | 1,143 |   | $ | (3,110 | ) | $ | 2,925 |   |
| Other comprehensive income (loss), net of tax           |   |                             |   |                           |   |   |   |   |   |
| Foreign currency translation adjustment                 |   | 111                              |   | (8                             | )      | 102 |   | (47 | ) |
| Unrealized gain (loss) on available for sale securities |   | (7                               | )      | (14                            | )      | (42 | ) | 45 |   |
| Comprehensive income (loss)                             |   | $                                | (441   | )                              | $      | 1,121 |   | $ | (3,050 | ) | $ | 2,923 |   |

 

**Note3.  INVENTORIES, NET**

 
|               |   | **June 30,  2002** |   | **December  31,  2001** |   |
|--------------------|--------|--------------------|--------|-------------------------|--------|
|               |   | **(unaudited)**    |   |                    |   |
| Raw materials      |   | $                  | 3,631  |                    | $      | 1,254 |   |
| Work in process    |   | 8,141              |   | 5,587                   |   |
| Finished goods     |   | 4,873              |   | 3,407                   |   |
|               |   | 16,645             |   | 10,248                  |   |
| Valuation  reserve |   | (3,705             | )      | (941                    | )      |
|               |   | $                  | 12,940 |                    | $      | 9,307 |   |

 

Included in the June 30, 2002 inventory balances aboveis $7,142 of gross inventory and $2,582 of valuation reserve for a net balanceof $4,560 for GHz Technology, Inc. and Microsemi RF Products, Inc., a whollyowned subsidiary of Microsemi Corporation, the acquisitions made on January 25,2002 and May 24, 2002, respectively (see Note 5 and Note 6).

 

6

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**Note4.  NET INCOME PER SHARE**

 

Basic net income per share is computed using theweighted average number of shares of common stock outstanding for the period.Diluted net income per share is computed using the weighted average number ofshares of common stock and dilutive potential common shares related to stockoptions and warrants outstanding during the period.

 

Incremental shares related to outstanding stockoptions of 852,000 and 906,000 for the three and six months ended June 30, 2002were excluded from the calculation of diluted net loss per share because theeffect would have been anti-dilutive.

 

Incremental shares related to outstanding stockoptions and warrants of approximately 641,000 and 733,000 for the three and sixmonths ended June 20, 2001, were included in the calculations of diluted netincome per share for that period. Incremental shares related to outstanding stock options of approximately128,000 for the three and six months ended June 30, 2001 were excluded from thecalculations because the impact would be anti-dilutive.

 

**Note5.  ACQUISITION OF GHZ TECHNOLOGY, INC.**

 

OnJanuary 25, 2002, APT acquired all of the outstanding shares and stockoptions of GHz Technology, Inc. (GHz), in exchange for cash, APT common stock,and APT stock options.  The GHz assets acquired included approximately$205 in cash and $7.7 million in marketable securities.  The transaction was accounted for by thepurchase method of accounting, in accordance with FAS 141, “BusinessCombinations” and FAS 142, “Goodwill and Other Intangible Assets.” APT hasobtained a third party valuation study to estimate the fair value of theacquired intangible assets.  APT beganto consolidate the financial results of GHz Technology on January 25, 2002and forward.  The purchase pricefor accounting purposes was derived as follows:

 

|                  |   | **Shares** |   | **Fair Value** |   |
|-----------------------|--------|------------|--------|----------------|--------|
| Cash                  |   |       |   | $              | 13,453 |   |
| Stock                 |   | 1,522,976  |   | 16,220         |   |
| Exchanged  options    |   | 425,823    |   | 4,093          |   |
| Direct costs          |   |       |   | 837            |   |
| Total purchase  price |   |       |   | $              | 34,603 |   |

 

APT common stock was valued at the average stock priceat the time of the transaction.  Withrespect to stock options exchanged as part of the merger consideration, allvested and unvested GHz options exchanged for APT options are included as partof the purchase price based on their fair value.  The estimated fair value of the options to be assumed by APT isbased upon the Black-Scholes model using the following assumptions:

•               Expected life of 5years

•               Expected volatilityof 100%

•               Risk-free interestrate of 4.3%; and

•               Expected dividendrate of 0%

 

GHz’s products complementAPT’s current portfolio of Radio Frequency (RF) products that operate atfrequencies ranging from 1 MHz to 100 MHz and are sold into applications suchas semiconductor capital equipment, medical imaging, and industrial systems.The GHz products are capable of frequencies ranging from 10 MHz to 3.5 GHz andare primarily sold into applications such as avionics and radar as well aswireless communications and semiconductor capital equipment

 

7

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The allocation of purchase price was as follows:

 

| Net book value of tangible assets of GHz                 |   | $      | 11,591 |   |
|----------------------------------------------------------|--------|--------|--------|--------|
| Inventory fair  value adjustment                         |   | 450    |   |
| Deferred  compensation on unvested stock options assumed |   | 523    |   |
| Acquired  in-process research & development          |   | 1,897  |   |
| Acquired  intangible technology rights                   |   | 7,449  |   |
| Goodwill                                                 |   | 15,061 |   |
| Deferred tax  liability                                  |   | (2,368 | )      |
| Allocated  purchase price                                |   | $      | 34,603 |   |

 

In connection with this acquisition, the Companyrecorded a one time charge of $1.9 million for the write-off of in-processresearch and development (IPR&D). The value assigned to IPR&D related to research projects for whichtechnological feasibility had not yet been established and for which there wasno other feasible alternative use for the technology.  In addition, the Company recorded an intangible asset foracquired current technology rights in the amount of $7.4 million, to beamortized over ten years, the expected life of the technologies.  Total goodwill recorded was $15.1million.  The IPR&D, technologyrights and goodwill amounts are not deductible for tax purposes.

 

The values of IPR&D and technology rights weredetermined by estimating the net cash flows from the sale of products from thesetechnologies over a ten year period and discounting the net cash flows back totheir present value using risk adjusted interest rates of 15-20% for currenttechnologies and 25-40% for in-process technologies.  The estimated net cash flows from these products were based onmanagement’s estimates of related revenues, costs of goods sold, operatingexpenses, income taxes, and additional costs to completion for in-processtechnologies.

 

The nature of the efforts to develop the in-processtechnology into commercially viable products principally relate to thecompletion of all designing, prototyping, verification and testing activitiesthat are necessary to establish that the product can be produced to meet itsdesign specifications, including function, features, and technical performancerequirements.  GHz had three mainproduct groups under development at the acquisition date that met the minimumdevelopment requirements for IPR&D projects.  Each contributed from 11% to 62% of the total IPR&Dvalue.  The projects included L Band andS Band radar as well as commercial LDMOS applications.  The projects ranged from 65% to 75%complete.  All projects had expectedcompletion dates within 12 to 18 months and an estimated aggregate cost tocomplete of $1.2 million.

 

**Note6.  ACQUISITION OF MICROSEMI RFPRODUCTS, INC., A WHOLLY OWNED SUBSIDIARY OF MICROSEMI CORPORATION**

 

On May 24, 2002, APT acquired the product lines andcertain assets of Microsemi RF Products, Inc. (MSC RF), a wholly ownedsubsidiary of Microsemi Corporation, for $12,200,000 in cash.  The transaction was accounted for by thepurchase method of accounting, in accordance with FAS 141, “BusinessCombinations” and FAS 142, “Goodwill and Other Intangible Assets.” APT hasobtained a third party valuation study to estimate the fair value of theacquired intangible assets.  APT beganto consolidate the financial results of the acquired business on May 24, 2002and forward.  The purchase price foraccounting purposes was $12,200 in cash and $222 in direct costs.

 

MSC RF produces and sells bipolar RF transistors thatare used in a variety of radar, avionics, communications and general purposeapplications.  MSC RF’s productscomplement GHz’s technology (see Note 5) as well as APT’s current portfolio ofRadio Frequency (RF) products.  Thecombination of the three companies’ RF products and technologies positions APTas an emerging dominant supplier in bipolar RF power transistors for avionics,radar and non-cellular communications applications.

 

8

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The allocation of purchase price was as follows:

 

| Net book value of tangible assets acquired             |   | $     | 7,325  |   |
|--------------------------------------------------------|--------|-------|--------|--------|
| Inventory fair  value adjustment                       |   | 505   |   |
| Property, plant  & equipment fair value adjustment |   | 208   |   |
| Acquired  in-process research & development        |   | 211   |   |
| Acquired  intangible technology rights                 |   | 3,314 |   |
| Goodwill                                               |   | 859   |   |
| Allocated  purchase price                              |   | $     | 12,422 |   |

 

In connection with this acquisition, the Companyrecorded a one time charge of $211 for the write-off of in-process research anddevelopment (IPR&D).  The valueassigned to IPR&D related to research projects for which technologicalfeasibility had not yet been established and for which there was no otherfeasible alternative use for the technology. In addition, the Company recorded an intangible asset for acquiredcurrent technology rights in the amount of $3.3 million, to be amortized overten years, the expected life of the technologies.  Total goodwill recorded was $859.  The IPR&D, technology rights and goodwill amounts aredeductible for tax purposes.

 

The values of IPR&D and technology rights weredetermined by estimating the net cash flows from the sale of products fromthese technologies over a ten year period and discounting the net cash flowsback to their present value using risk adjusted interest rates of 30% forcurrent technologies and 35-40% for in-process technologies.  The estimated net cash flows from theseproducts were based on management’s estimates of related revenues, costs ofgoods sold, operating expenses, income taxes, and additional costs tocompletion for in-process technologies.

 

The nature of the efforts to develop the in-processtechnology into commercially viable products principally related to thecompletion of all designing, prototyping, verification and testing activitiesthat are necessary to establish that the product can be produced to meet itsdesign specifications, including function, features, and technical performancerequirements.  MSC RF had two mainproduct groups under development at the acquisition date that met the minimumdevelopment requirements for IPR&D projects.  Each contributed 88% and 12% to the total IPR&D value.  The projects included Junction Field EffectTransistor (JFET) and Powermite3 applications. Each projects had expected completion dates within 12 to 18 months andan estimated aggregate cost to complete of $30.

 

9

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**Note7.  PRO FORMA CONDENSED CONSOLIDATEDRESULTS**

 

The following table reflects the unaudited combinedresults of APT, GHz, and MSC RF as if the acquisitions had taken place as ofJanuary 1, 2001 and 2002, respectively. The pro forma information includes non-cash charges for amortization oftechnology rights, inventory fair value adjustments, fixed asset depreciationand deferred compensation related to the acquisitions, consistent withgenerally accepted accounting principles. Both periods exclude a charge of $2.1 million for in-process researchand development expense.  Both periodsinclude the results of GHz and the acquired business of MSC RF beginning onJanuary 1, 2002 and 2001, respectively. The pro forma information does not necessarily reflect the actualresults that would have occurred if the companies had been combined during theperiods nor is it necessarily indicative of future results of operations forthe combined companies.

 
|                                                                                       |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                                       |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** | ** ** |
| Revenues, net                                                                              |   | $                                 | 12,034 |                            | $      | 17,311 |   | $ | 23,067 |   | $ | 36,057 |   |
|                                                                                       |   |                              |   |                            |   |   |   |   |   |
| Net income  (loss)                                                                         |   | (509                              | )      | 602                             |   | (1,779 | ) | 1,543 |   |
|                                                                                       |   |                              |   |                            |   |   |   |   |   |
| Net income  (loss) per share:                                                              |   |                              |   |                            |   |   |   |   |   |
| Basic                                                                                      |   | $                                 | (0.05  | )                               | $      | 0.06 |   | $ | (0.17 | ) | $ | 0.15 |   |
| Diluted                                                                                    |   | (0.05                             | )      | 0.05                            |   | (0.17 | ) | 0.13 |   |
| Weighted average  number of shares used in the computation of net income (loss) per share: |   |                              |   |                            |   |   |   |   |   |
| Basic                                                                                      |   | 10,356                            |   | 10,146                          |   | 10,523 |   | 10,061 |   |
| Diluted                                                                                    |   | 10,356                            |   | 11,430                          |   | 10,523 |   | 11,437 |   |

 

**Note8.  SEGEMENT INFORMATION**

 

APT operates in one segment and is engaged in thedesign, development, manufacture and sale of high power, high frequency powersemiconductor products.

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This discussion and analysis is intended to be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations set forth in our Annual Report on Form 10-K for theyear ended December 31, 2001.

** **

**Forward-lookingStatements and Risk Factors Affecting Business and Results of Operations**

 

All statements and trend analyses contained in thisitem and elsewhere in this report on Form 10-Q relative to the futureconstitute “forward-looking” statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Forward-statements are subject to thebusiness and economic risks faced by us and our actual results of operationsmay differ materially from those contained in the forward-looking statements.In addition, results of operations for the periods discussed below should notbe considered indicative of the results to be expected in any future period andfluctuations in operating results might result in fluctuations in the marketprice of our common stock. Our quarterly and annual operating results may varysignificantly depending on many factors, including but not limited to, theability of subcontractors to meet their delivery commitments; unfavorablechanges in industry and competitive conditions; our mix of product shipments;the accuracy of our customer’s forecasts; the effectiveness of our efforts tocontrol and reduce costs; and other risks detailed in “Management’s Discussionand Analysis of Financial Condition and Results of Operations - Risk FactorsAffecting Business and Results of Operations” in our Annual Report on Form 10-Kfor the year ended December 31, 2001, filed with the Securities and ExchangeCommission.

 

**Overview**

 

We are a leading designer, manufacturer and marketerof high-performance power semiconductors and modules for switching and RFapplications. Power semiconductors manage and regulate electrical power byconverting electricity into a form required by electrical and electronicproducts. Our power semiconductors increase system efficiency, permit thedesign of more compact end products and improve features and functionality. Weare primarily focused on the high power, high frequency segment of the powersemiconductor market. High power refers to the ability to dissipate above onekilowatt, and high frequency refers to the ability to switch on and off atrates above 100 kilohertz. In addition we are strengthening our portfolio ofRadio Frequency (RF) products that operate at frequencies ranging from 1megahertz to 100 megahertz. RF generally refers to the ability to operate at frequenciesabove 1 megahertz. We sell our products primarily in North America, Europe, andAsia, through a network of independent sales representatives and distributors.

 

To further our penetration in RF power markets wecompleted the acquisition of GHz Technology, Inc. in January 2002, whichhas a portfolio of products capable of frequencies ranging from 10 megahertz to3.5 gigahertz and are primarily sold into applications such as avionics andradar.  In addition, in May 2002, wecompleted the acquisition of the product lines and certain assets of MicrosemiRF Products, Inc., a wholly owned subsidiary of Microsemi Corporation. Theacquisitions were recorded as purchase transactions and we recorded one-timecharges for purchased in-process research and development expenses in the firstand second quarters of 2002. We will also incur ongoing acquisition relatedexpenses for amortization of intangible assets and deferred compensationrelated to stock options.

 

**Critical Accounting Policies andEstimates**

 

Advanced Power Technology’s discussion andanalysis of its financial condition and results of operations are based uponconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires APT to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities. On an on-going basis, APTevaluates its estimates, including those related to product returns andwarranty obligations, bad debts, inventories, investments, income taxes, excesscomponent order cancellation costs, and contingencies and litigation. APT basesits estimates on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances, the results of whichform the basis for

 

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making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom these estimates under different assumptions or conditions.

 

APT believes the following critical accounting policies affect its moresignificant judgments and estimates used in the preparation of its consolidatedfinancial statements.

 

**•****                                         **APT maintains allowances for doubtful accounts forestimated losses resulting from the inability of its customers to make requiredpayments. If the financial condition of our customers were to deteriorate,resulting in an impairment of their ability to make payments, additionalallowances may be required.

 

•                                          APT provides for the estimated cost of productwarranties at the time revenue is recognized. While the Company engages inextensive product quality programs and processes, including actively monitoringand evaluating the quality of its component suppliers, APT’s warrantyobligation is affected by product non-conformance rates, material usage andservice delivery costs incurred in correcting a product non-conformance. Shouldactual product non-conformance rates, material usage or service delivery costsdiffer from APT’s estimates, revisions to the estimated warranty liabilitywould be required.

 

•                                          APT writes down its inventory for estimatedobsolescence or unmarketable inventory equal to the difference between the costof inventory and the estimated net realizable value based upon assumptionsabout future demand and market conditions. If actual market conditions are lessfavorable than those projected by management, additional inventory write-downsmay be required.

 

•                                          APT records an investment impairment charge whenit believes an investment has experienced a decline in value that is other thantemporary. Future adverse changes in market conditions or poor operatingresults of underlying investments could result in losses or an inability torecover the carrying value of the investments that may not be reflected in aninvestment’s current carrying value, thereby possibly requiring an impairmentcharge in the future.

 

•                                          APT records a valuation allowance to reduce itsdeferred tax assets to the amount that is more likely than not to be realized.While APT has considered future taxable income and ongoing prudent and feasibletax planning strategies in assessing the need for the valuation allowance, inthe event APT were to determine that it would be able to realize its deferredtax assets in the future in excess of its net recorded amount, an adjustment tothe deferred tax asset would increase income in the period such determinationwas made. Likewise, should APT determine that it would not be able to realizeall or part of its net deferred tax asset in the future, an adjustment to thedeferred tax asset would be charged to income in the period such determinationwas made.

 

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**Results ofOperations**

 

                Thefollowing table presents our consolidated statement of operations data for theperiods indicated as a percentage of net revenue:

 

|                                     |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                     |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
| Revenues, net                            |   | 100.0                            | %      | 100.0                          | %      | 100.0 | % | 100.0 | % |
| Cost of goods sold                       |   | 66.1                             |   | 63.1                           |   | 67.0 |   | 61.7 |   |
| Amortization of technology rights, other |   | 5.3                              |   | —                         |   | 5.1 |   | — |   |
| Total cost of goods sold                 |   | 71.4                             |   | 63.1                           |   | 72.1 |   | 61.7 |   |
| Gross profit                             |   | 28.6                             |   | 36.9                           |   | 27.9 |   | 38.3 |   |
| Operating expenses:                      |   |                             |   |                           |   |   |   |   |   |
| Research and development                 |   | 9.0                              |   | 4.0                            |   | 10.5 |   | 3.3 |   |
| Selling, general and administrative      |   | 28.3                             |   | 23.2                           |   | 29.2 |   | 21.9 |   |
| In-process research & development    |   | 2.0                              |   | —                         |   | 11.1 |   | — |   |
| Total operating expenses                 |   | 39.3                             |   | 27.2                           |   | 50.8 |   | 25.2 |   |
| Income (loss) from operations            |   | (10.7                            | )      | 9.7                            |   | (22.9 | ) | 13.1 |   |
| Interest & other income, net         |   | 1.1                              |   | 4.4                            |   | 2.0 |   | 4.5 |   |
| Income (loss) before income tax expense  |   | (9.6                             | )      | 14.1                           |   | (20.9 | ) | 17.6 |   |
| Income tax (benefit) expense             |   | (4.5                             | )      | 4.2                            |   | (4.5 | ) | 5.8 |   |
| Net income (loss)                        |   | (5.1                             | )%     | 9.9                            | %      | (16.4 | )% | 11.8 | % |

* *

*Revenues.*  Revenues for the secondquarter of 2002 were $10.7 million, including $3.5 million from GHz TechnologyInc. (“GHz”) and Micosemi RF Products, Inc (“MSC RF”), a wholly ownedsubsidiary of Microsemi Corporation, which Advanced Power Technology acquiredeffective January 25 and May 24, 2002, respectively.  This represents a decrease of 7.2% compared to the $11.5 millionin the second quarter of 2002.  Withoutthe additional revenues from our acquisitions, revenues were $7.2 million inthe second quarter of 2002 representing a 37.4% decline from the prior yearquarter.  Exclusive of the acquisitions,revenues were lower than the prior year quarter due to lower volumes in thecommunications and industrial/medical markets, while revenues in thesemiconductor capital equipment market were approximately the same.  Revenues from our acquisitions were mainlyin the military and aerospace markets. Revenues through distribution were approximately 20% in the secondquarter of 2002 compared to 26% in the second quarter of 2001.

 

Revenues for the first six months of 2002 were $18.9million, including $5.5 million from GHz and MSC RF, compared to $24.7 millionin the first six months of 2001, which represents a decline of 23.3%.  The semiconductor market experienced recordgrowth over the year 2000 and the first half of 2001, followed by recorddeclines through the second half of 2001. Our 2002 revenues have shown some sequential increase from the lowlevels of the second half of 2001, but still remains below the levels achievedin the first half of 2001.  While we areuncertain as to the magnitude of the recovery, we have experienced sequentialrevenue growth of 16% in each of the first and second quarters of 2002excluding revenues from our acquisitions. Revenues through distribution were approximately 20% in the first sixmonths of 2002 compared to 24% in the first six months of 2001.

* *

*Gross Profit.*  Gross profit for thesecond quarter of 2002 was 28.6% compared to 36.9% for the second quarter of2001.  Excluding the non-cash purchaseaccounting adjustments for the fair value of inventory acquired and the amortizationof the technology rights asset, gross profit was 33.9% for the second quarterof 2002. The decline in gross profit over the prior year quarter is primarilydue to lower fixed cost absorption in the Company’s internal manufacturingfacilities.

 

Gross profit for the first six months of 2002 was27.9% compared to 38.3% for the first six months of 2001.  Excluding the non-cash purchase accountingadjustments for the fair value of inventory acquired and the amortization ofthe technology rights asset, gross profit was 33.0% for the second quarter of2002. The decline in

 

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gross profit over the prior year is primarily due to lower fixed costabsorption in the Company’s internal manufacturing facilities due to lowervolumes as explained above.  Inaddition, due to the sequential volume increases we have experienced in thefirst and second quarters of 2002, our gross profit has improved sequentiallyfrom the low levels experienced in the second half of 2001.

* *

*Research and Development Expense.*  Second quarterof 2002 research and development expenses totaled $960,000 or 9.0% of revenues,compared to $465,000, or 4.0% of revenue in the second quarter of 2002, and$1,021,000 in the first quarter of 2001. The increased spending over the prioryear quarter is due to the addition of GHz, which was $538,000 in the secondquarter of 2002, consisting mainly of payroll, supplies, and depreciationcharges.  Without the acquisition ofGHz, research and development expenses declined from the prior year quartermainly due to lower spending on supplies. However, in spite of the difficult market environment the Companyhas been accelerating its research and development programs leading to theintroduction of new products, especially in its Power MOS 7TM products.

* *

*Selling, General and Administrative Expense.*  Selling,general and administrative expenses totaled $3.0 million in the second quarterof 2002, or 28.3% of revenues, a 13.3% increase compared to the $2.7 million inthe second quarter of 2001.  The changefrom the prior year quarter is due to the acquisitions of GHz and MSC RF, whichcontributed $762,000 of selling, general and administrative expenses in thesecond quarter of 2001, consisting mainly of payroll, commissions, and facilityand depreciation expense.  The increasein expenses due to the acquisitions was offset by lower spending on payroll andcommissions by APT on a before acquisition basis compared to the prior yearquarter.  The Company beganprogressively phasing out the wage freeze and graduated pay reductions duringthe second quarter of 2002.

* *

*Stock Compensation Expense.*  Stockcompensation expense includes costs relating to stock–based employeecompensation arrangements, and is based on the difference between the fairmarket value of our common stock on the date of grant of options and theexercise price of options to purchase that stock. Stock compensation expense isrecognized over the vesting periods of the related options, typically fiveyears. On a consolidated basis, stock compensation expense of $130,000 wasrecorded in the second quarter of 2002. Of this amount, $50,000 was recorded incost of goods sold, $20,000 was recorded in research and development expenseand $60,000 was recorded in selling, general and administrative expense. Stockcompensation expense of $80,000 was recorded in the second quarter of 2001. Ofthis amount, $13,500 was recorded in cost of goods sold, $5,000 was recorded inresearch and development expense and $61,500 was recorded in selling, general andadministrative expense. The increase in deferred compensation expense over theprior year quarter is due to the exchanged stock options issued with theacquisition of GHz.  We expect to recordstock compensation expense of $103,000 in the third quarter of 2002.

* *

*Interest and o**ther income, net*.  Interestand other income, net, which includes interest income, interest expense andother expense, was $114,000 in the second quarter of 2002 compared to $506,000in the second quarter of 2001.  Theprimary component is interest income on our cash and marketablesecurities.  Net interest income was$162,000 in the second quarter of 2002 compared to $474,000 in the secondquarter of 2001.  The decline ininterest income is primarily due to much lower interest rates available in thecurrent investment market and a lower investment balance due to cash used inthe acquisition of GHz and MSC RF.

* *

*IncomeTax Expense (Benefit)*. We recorded a tax benefit in the second quarter of 2002, at an effectivetax rate of 46.8%.  The second quartertax rate benefit is greater than the expected tax rate benefit for the yearprimarily due to the benefit of a reduction in the valuation allowance due tothe realization of foreign net operation loss carry forwards.  We expect our annual effective tax rate willapproximate 23.0% for 2002.  Thedifference between the expected annual effective tax and the federal statutoryrate is primarily due to the book expense of in process research anddevelopment expenses that are not deductible for tax purposes, partially offsetby the benefit of a reduction in the valuation allowance due to the realizationof foreign net operating loss carry forwards. The effective tax rate in the first six months of 2001 was approximately33.0%.

** **

**Liquidity and Capital Resources**

 

In the first six months of 2002, we generatedapproximately $3.0 million from operating activities.  This was primarily from our net loss of $3.1 million offset bynon-cash charges for depreciation and amortization of $1.5 million, IPR&Dof $2.1 million and a decrease in prepaid and other assets of $1.6million.  The decrease in prepaid andother assets was mainly due tax refunds received for $1.4 million.

 

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In the first six months of 2002,we used approximately $16.9 million in investing activities, whichconsisted mainly of our acquisitions of GHz and MSC RF, partially offset by netproceeds from the sale and purchase of marketable securities of $10.6 million.  The acquisition of GHz consumed $14.1million of cash and direct costs, net of cash acquired of $205,000.  In addition we issued APT stock and optionsvalued at $20.3 million.  The GHz assetsacquired included approximately $205,000 in cash and $7.7 million in marketablesecurities.  The acquisition of MSC RFconsumed $12.4 million of cash, including $222,000 ofdirect costs.

 

In the first six months of 2002,we generated approximately $306,000 from financing activities, which primarilyconsisted of net proceeds of $342,000 from the exercise of stock options.

 

APT currently expects to fundexpenditures for capital requirements as well as liquidity needs from acombination of available cash balances, internally generated funds andfinancing arrangements if needed. As of June 30, 2002, APT had$18.9 million in cash and cash equivalents and available-for-salesecurities. APT’s investment policy is to invest in short term, high-gradeliquid investments with the goal of capital preservation. APT’s ability togenerate positive cash flow from operations may be affected by marketconditions as well as other risk factors as described in our Annual Report onForm 10-K for the year ended December 31, 2001. We expect from time to time toevaluate potential acquisitions and equity investments complementary to ourmarket strategy. To the extent we pursue such transactions, we could requireadditional equity or debt financing to fund such activities or to fund ourworking capital requirements in the event of an industry downturn or anunexpected adverse change in our business operations. To the extent we requireadditional capital, we cannot assure you that we will be able to obtain suchfinancing on terms favorable to us, or at all.

 

**Recent Accounting Pronouncements**

 

In October 2001, the FASB issued Statement ofFinancial Accounting Standards No. 144 (SFAS 144) *“Accounting for the Impairment orDisposal of Long-Lived Assets”*, which addresses financial accountingand reporting for the impairment or disposal of long-lived assets. Thisstatement supersedes FASB Statement No. 121, *“Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of”*, andthe accounting and reporting provisions of APB Opinion No. 30, *“Reportingand Results of Operations – Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions”,* for the disposal of a segment of a business. Thisstatement also amends Accounting Research Bulletin No. 51, *“ConsolidatedFinancial Statements”*, to eliminate the exception to consolidationfor a subsidiary for which control is likely to be temporary. The provisions ofSFAS 144 are effective for fiscal years beginning after December 15, 2001. TheCompany does not expect any material impact on its statements of position,operations or cash flows due to the adoption of SFAS 144.

 

In June 2002, the FASB issued Statement ofFinancial Accounting Standards No. 146 (SFAS 146) *“Accounting for Costs Associated withExit or Disposal Activities”*, which addresses the accounting andfinancial reporting for costs associated with exit or disposal activities andnullifies Emerging Issues Task Force (EITF) Issue No. 94-3, *“LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).”*  The principal difference between the newstatement and the Issue No 94-3 is that a liability for a cost associated withan exit activity will be recognized when incurred, rather than when an entityhas made a commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activitiesthat are initiated after December 31, 2002, with early application encouraged.The Company does not expect any material impact on its statements of position,operations or cash flows due to the adoption of SFAS 146.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

We do not use derivative financial instruments in ourinvestment portfolio. Due to the short duration and conservative nature of ourcash equivalents, and the high quality and conservative nature of ourinvestments, we do not expect any material loss with respect to our investmentportfolio.

 

Currently less than 3% of oursales are transacted in local currencies, primarily Euro dollars. As a result,our international results of operations are subject to foreign exchange ratefluctuations, but only to a limited degree. We do

 

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not currently hedge against foreign currency rate fluctuations. Most ofour export sales and sales by APT Europe are in U.S. dollars, and most ofour foreign currency sales are from operations with significant expenses in thesame currency. As a result, gains and losses from such fluctuations have notbeen material to our consolidated results of operations.

 

**PARTII.  OTHER INFORMATION**

 

**ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K**

 

(a) The exhibits filed as part of this report are listed below:

 
| **Exhibit  No.** |   |                                                                                                                     |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------|
| 99.1             |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|             |   |                                                                                                                     |
| 99.2             |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

(b) Reports on Form 8-K

 

During the three month period ended June 30, 2002, areport on Form 8-K was filed on June 17, 2002. An amendment to this Form 8-K was filed August 14, 2002.

 

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**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized this 14thday of August, 2002.

 
|   |   | ADVANCED POWER TECHNOLOGY, INC.             |
|--------|--------|---------------------------------------------|
|   |   |                                        |
|   |   | By:                                         | /s/ GREG M. HAUGEN |   |
|   |   |                                        |
|   |   | Greg M. Haugen                              |
|   |   | Vice President, Finance and Administration, |
|   |   |                                        | Chief Financial Officer and Secretary |
|   |   | (Principal Financial Officer)               |
|        |        |                                             |  |  |  |

 

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